Case Summary
In December 2016, the Illinois Legislature passed a sweeping energy bill that includes a zero-emission credit (ZEC) program. Modeled after New York’s ZEC mandate, the Illinois law awards qualified nuclear generators one ZEC for each MWh generated and requires utilities to purchase a specified number of ZECs. ZEC prices are pegged to the federal government’s measure of the social cost of carbon and may be adjusted downward by regulators based on an index of wholesale prices.

The law tasks the Illinois Power Agency with conducting a procurement for ZECs. The IPA must choose facilities “reasonably capable of generating cost-effective ZECs” and IPA must account for the environmental benefits “preserved by the procurement” and consider the recommendations of a state report that touts the benefits of preserving in-state nuclear plants. The law does not identify geographic criteria but instead requires the IPA to account for the effects on carbon dioxide emissions that result from electricity consumed in Illinois and other air pollutants that affect Illinois.

Generators that compete with the ZEC-receiving plants in the interstate electricity market and a group of Illinois consumers filed separate complaints in February 2017. In July, a federal district court in Illinois dismissed all claims and also found multiple procedural reasons for dismissal, potentially shutting the door to similar challenges to state electricity policies. In September 2018, the Seventh Circuit affirmed the lower court’s decision.

The plaintiffs argued that the state’s program requiring utilities to purchase ZECs from nuclear plants is preempted by the Federal Power Act because it: 1) “effectively replaces” a FERC-regulated wholesale price and thus intrudes on FERC’s exclusive jurisdiction over wholesale sales and 2) conflicts with FERC’s regulatory regime by “distorting” the outcomes in FERC-regulated markets. In addition, they asserted that by benefiting only in-state plants, the program discriminates in favor of in-state businesses and thus violates the dormant Commerce Clause.

With regard to the first preemption claim, the district court held that plaintiffs’ field preemption theories fail because Illinois has “sufficiently separated ZECs from wholesale transactions.” Under the Federal Power Act, therefore, “the ZEC program falls within Illinois’s reserved authority over generation facilities.”

Plaintiffs had argued that two 2016 Supreme Court decisions about the Federal Power Act support their claims. But the district court found otherwise. Because a generator receives ZECs for producing electricity regardless of whether it sells that energy through a FERC-regulated auction market the court found that “ZEC payments do not suffer from the ‘fatal defect’ in Hughes, nor do they alter the amount of money that is exchanged for wholesale electricity, see EPSA.” Rather, the court concluded that the state was “influencing the market by subsidizing a participant, without subsidizing the actual wholesale transaction” and such state action that “indirectly” affects the market is not preempted.

The district court also agreed with defendants that a 2012 FERC order concluding that states have jurisdiction over renewable energy credits (RECs) when they are sold “unbundled” from their associated power supports dismissal. According to the court, “while not dispositive, FERC’s acknowledgment that RECs are outside its jurisdiction indicates that similar programs that authorize transactions in state-created credits that are distinct from wholesale transactions are not preempted.”

With regard to second preemption claim, the district court found that any market-distorting effects of ZECs can be addressed by FERC. Plaintiffs’ conflict preemption theory is “too broad,” the court concluded, and if accepted would “inappropriately limit state authority. So long as FERC can address any problem the ZEC program creates with respect to just and reasonable wholesale rates . . . there is no conflict.” FERC’s “regulatory structure remains unaltered and [its] power undiminished.”

In rejecting the dormant Commerce Clause claims, the district court held that the Illinois statute “is not facially discriminatory because it does not preclude out-of-state generators from submitting bids for ZECs.”

On appeal, the Seventh Circuit affirmed the district court’s opinion. The panel rejected EPSA’s preemption theory, concluding that while federally regulated rates might affect the state-set ZEC price, ZECs permissibly influence the outcome of federally regulated auctions. By keeping nuclear plants in business through the award of ZECs, the state changes the total supply in the market and thus lowers the price paid to all generators in the auction. According to the court, “a state policy that affects price only by increasing the quantity of power available for sale is not preempted by federal law.”

The panel also agreed with the lower court on the meaning of the Supreme Court’s Hughes decision. In Hughes, the Court held that Maryland’s program to induce the construction of a new natural gas fired generator was preempted because it conditioned payment of funds on the state’s favored generator participating in the federally regulated auction. The Seventh Circuit panel rejected EPSA’s efforts to expand the Court’s holding and upheld the ZEC program because it rewards power generation, regardless of where the power is sold.

The panel also held that the ZEC program does not “overtly” discriminate under the dormant Commerce Clause. It rejected EPSA’s claim that the program unduly burdens interstate commerce, as well, finding that the Federal Power Act’s reservation of state authority over generation facilities would be meaningless if states could not choose among in-state generation facilities.

The panel declined to weigh in on the district court’s holding that the Federal Power Act does not allow a private plaintiff to a bring preemption claim.